Bridging Economics and the Social World
Vilfredo Pareto was an Italian economist and sociologist who made significant contributions to both fields. He originally rose to fame by applying mathematical concepts to economics. He turned to the field of sociology, however, when he noticed that mathematical concepts were not perfectly applicable to the real world and that human factors largely contributed to the ways society functions. Pareto is a steadfast believer that humans are illogical, and he used his balanced understanding of sociological and economic concepts to try improving functioning in political and social landscapes.
On their shoulders
For millennia, great thinkers and scholars have been working to understand the quirks of the human mind. Today, we’re privileged to put their insights to work, helping organizations to reduce bias and create better outcomes.
The 80/20 rule
Pareto’s law: 80% of output is the result of 20% of input.
What if you knew that 80% of what you were doing to achieve a goal was negligible, compared to 20% of your most focused efforts? Would you manage your time differently?
According to Vilfredo Pareto, this is the nature of how things work, in almost any given area. Pareto first used this law to explain the distribution of wealth in his home country, Italy, as he noticed that about 80% of the wealth belonged to a mere 20% of the population. Extrapolating his data to other areas of life, he calculated that 80% of a company’s revenue generally came from about 20% of its products and customers; 80% of all crimes are committed by 20% of all criminals, and 80% of all traffic accidents are caused by 20% of all drivers.
“Give me the fruitful error any time, full of seeds, bursting with its own corrections. You can keep your sterile truth for yourself.”
In reality, the 80/20 rule can be stretched: more logically, it is true that about 60-90% of all output is caused by 10-30% of all input. The numbers 80 and 20, however, appear often.
In an effort to accomplish any goal, it will just so happen that about 20% of the tasks on your “to-do” list will yield 80% of your results. Rather than focusing intense time and effort on each task in the sequential order of their deadlines, you are better off examining your list closely and choosing the most important 20% of tasks to be done. Spend 80% of your time doing these tasks proficiently, and worry about the other ones later.
Understanding the 80/20 rule can help governments, businesses, and individuals do better and spend their time and resources more efficiently. If we recognize that roughly 20% or less of any population holds 80% or more of the wealth, for example, we can focus our fundraising efforts on those who hold the most, rather than picking pennies from the middle-class. Today, in America, the upper “20%” actually looks more like a one percent―or, according to some sources, even a 0.01%.
“For many events, roughly 80% of the effects come from 20% of the causes.”
― Vilfredo Pareto
Circulation of elites
Circulation of elites―the optimal functioning of our society requires the mobility of people in different social classes.
It’s all too obvious today, but it was Pareto who noticed back in the day that those most qualified to lead in government were often not the ones in charge.
In an ideal world, and in perfectly open societies, those with the most ability to govern and lead would easily rise to the top. Unfortunately, Pareto realized that factors such as wealth, status, and privilege got in the way. This privilege gives people of different social classes varying opportunities and obstacles that limit or enhance their ability to rise to power.
“It is a known fact that almost all revolutions have been the work, not of the common people, but of the aristocracy, and especially of the decayed part of the aristocracy.”
Evidently, he didn’t solve this problem. His theory, however, informed people about how the fixation of social classes was an impediment to the best possible leadership.
Pareto argued that if the government can find ways to assimilate those with the highest abilities in the lower classes into higher social ranks, then they could have chances at elitist positions, allowing society to function much better. Maximum social mobility was his goal.
Understanding Pareto’s theory can inspire us to consider ways we can provide opportunities for those in lower social rankings. These methods of ‘affirmative action’ could be in the forms of employment, education, or other avenues of access, like funding or networking opportunities. Making it more difficult for those born into power to maintain their elitism may also relieve our society of burden, and distribute some 80% of our wealth more evenly.
Pareto efficiency occurs when resources are allocated most efficiently, such that no one’s wealth can be increased without someone else’s wealth being decreased.
Imagine two societies, each with 10 people and $15, 000 in total resources. In Society A, each person has $1000, and there is an extra $5000 sitting useless, in a vault. In Society B, there is no vault and no extra money―the extra $5000 is out in the community. The consequence, however, is that some people are richer―$3000, $2000, $1500―while others are poorer―$800, $500, $200.
Which society do you deem better? The one in which everyone has an equal amount of resources, or in which all resources are made available, even if unevenly distributed?
“Increase in the wealth per capita fosters democracy; but the latter, at least according to what we have been able to observe up to now, entails great destruction of wealth and even eventually dries up the sources of it. Hence it is its own grave-digger, it destroys what gave it birth.”
According to Pareto efficiency, the best society is the one in which all resources are used―even if the distribution is unfair.
Pareto efficiency laid the foundation of modern welfare economics: the study of how economics affects social wellbeing. In other words, his theory was the first economic theory to take into account economics’ influence on how society can improve.
Keep in mind: Pareto’s efficiency has nothing to do with equality, but rather with efficiency: making the most of the resources available. While it will not improve the livelihoods of every individual, the society as a whole will always be better off when all available resources are used. The way to measure this, according to Pareto, is to make sure that no one’s wealth can increase unless someone else’s wealth were to decrease. If someone’s wealth can come from “the vault,” or what’s still in the hands of the government, the economic structure needs a do-over.
Pareto was born in Paris in 1848 to Italian parents. He studied mathematics and physics at university and graduated with a doctorate degree in engineering from the University of Turin in 1869.
After graduating, Pareto originally became the director of an Italian railway. Although his engineering thesis showed traces of his interests in sociology and economics, he did not begin studying either subject intently until his mid-40’s.
Becoming an advocate of classical liberalism, Pareto was hired as a lecturer in the economics department at the University of Florence in 1886. There, he became interested in sociology and the role of power and government in society. He spent the rest of his life as the Chair of Political Economy at the University of Lausanne, in Switzerland.
“People reasoning on essences may sometimes substitute certitude for probability, even very great probability. But we know nothing about essences and accordingly lose our certitude.”
―Vilfredo Pareto, The Mind and Society
Pareto is most well-known for his 80/20 rule, which he developed in 1906 after a mathematical observation of Italy’s income distribution. He is also famous for developing the first social cycle theory, the circulation of elites, as well as his welfare economic theory, Pareto efficiency. All his theories are extremely applicable today when we consider how our governments allocate their resources, prioritize their time in office, and create opportunities for advancement and social mobility.
Although he worked well with other sociologists, Pareto always thought their economic conceptions were flawed, and held a unique position at the meeting place of sociology and economics. He primarily worked alone.
Pareto was vehemently opposed to Marxism, and some of his views have been deemed fascist by sociologists of today and other fascist thinkers of his time. He died in 1923 in Switzerland.
“The world has always belonged to the stronger, and will belong to them for many years to come. Men only respect those who make themselves respected. Whoever becomes a lamb will find a wolf to eat him.”
Books, articles, and lectures
Cours d’économie politique (1896–97): Pareto’s first book, Political Economy Course, was written to prove that income distribution in any society is not random, but rather has inched toward a consistent pattern throughout history.
Manuale d’economia politica (1906): His next book, Manual of Political Economy, developed his theory of pure economics and put forth the ideas of Pareto efficiency and the Pareto principle (the 80/20 rule).
Trattato di sociologia generale (1916): Pareto’s most famous work, Mind and Society, inquired into the nature of individual and social actions, and coined the term ‘circulation of elites.’
- Brock, T. (2020, December 25). Pareto efficiency definition. Investopedia. https://www.investopedia.com/terms/p/pareto-efficiency.asp#:~:text=An%20economy%20is%20said%20to,major%20pillar%20of%20welfare%20economics
- Circulation of elites. (2010, July 24). Wikipedia, the free encyclopedia. Retrieved January 8, 2021, from https://en.wikipedia.org/wiki/Circulation_of_elite#:~:text=The%20circulation%20of%20elite%20is,Pareto%20(1848%E2%80%931923).&text=The%20role%20of%20ordinary%20people,of%20one%20elite%20or%20another
- Clayton, M. (2018, April 19). What is the Pareto Principle - The 80 20 Rule? PM in Under 5 [Video]. YouTube. https://www.youtube.com/watch?v=9Asdx97WE_8&t=191s&ab_channel=OnlinePMCourses-MikeClayton
- Ingham, S. (2019, November 28). Pareto-optimality. Encyclopedia Britannica. https://www.britannica.com/topic/Pareto-optimality
- Marshall, D. (2012, December 24). Elite Theory [Video]. YouTube. https://www.youtube.com/watch?v=BW8ffvXiRtU&t=171s&ab_channel=DebraMarshall
- The Editors of Encyclopaedia Britannica. (2020, August 15). Vilfredo Pareto. Encyclopedia Britannica. https://www.britannica.com/biography/Vilfredo-Pareto
- Vilfredo Pareto. (2001, November 4). Wikipedia, the free encyclopedia. Retrieved January 8, 2021, from https://en.wikipedia.org/wiki/Vilfredo_Pareto